Class Structure and Economic Inequality - Levy Economics Institute

42 Pages·2007·0.53 MB·English

by  Ajit Zacharias

Working Paper No. 487

Class Structure and Economic Inequality

By

Edward N. Wolff
Levy Economics Institute of Bard College Institute and New York University

and

Ajit Zacharias
Levy Economics Institute of Bard College

January 2007

Acknowledgments: Our primary debt is to Hyunsub Kum who implemented the statistical matching
algorithms used in creating the synthetic dataset used in this study. We are grateful for comments from
Stephan Klasen and Michael Zweig. We have also benefited from discussions about our paper with
participants in the conferences of the Working Class Studies Association, Eastern Economic Association,
Allied Social Science Association and International Association for Research on Income and Wealth. We
alone are responsible for any errors and omissions.

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Copyright © The Levy Economics Institute 2007 All rights reserved.
Class Structure and Economic Inequality
By Edward N. Wolff and Ajit Zacharias

ABSTRACT
Existing empirical schemas of class structure do not specify the capitalist class in an
adequate manner. We propose a schema in which the specification of capitalist
households is based on wealth thresholds. Individuals in noncapitalist households are
assigned class locations based on their position in the labor process. The schema is
designed to address the question of the relationship between class structure and overall
economic inequality. Our analysis of the U.S. data shows that class divisions among
households, especially the large gaps between capitalist households and everyone else,
contribute substantially to overall inequality.

Keywords: Class Analysis, Living Standards, Inequality

JEL Classifications: B51, D31, P16, Y80
2
1. INTRODUCTION
Conflict between major social classes over the distribution of national income was a
central concern of classical economists. Karl Marx further developed the understanding
of class structure by linking it explicitly to the historically specific forms of property
relations and organization of the labor process (Milios 2000; Zweig 2005). However,
with the emergence and subsequent ascendancy of marginalist theory, classes
disappeared from the field of economics, to be replaced by “agents” possessing,
somewhat mysteriously acquired, preferences and endowments. Recent debates over the
so-called “microfoundations” of Marxian economics have touched upon questions of
class—particularly over whether class can be construed as an aggregation of individuals
or individuals matter only as bearers of irreducible class relations (Philip 2005; Goldstein
2006). While these discussions might perhaps have an intrinsic merit, it is arguable that
they do not add much in way of aiding the descriptive task of specifying the class
structure of modern capitalist economies or in the study of how class structure shapes
various inequalities, for example, in income or educational outcomes, among individuals.
The descriptive power of class analysis and the relationships between class structure and
forms of economic and social inequality, were, however, key concerns of the classical
economists and Marx. These concerns are no less relevant today and attention to them
can contribute to maintaining the practical usefulness of class analysis.
Questions of class structure and the relationship between class and inequality
have been taken up for systematic study within the discipline of sociology, where the
Marxist and Weberian modes of class analysis have dominated the intellectual landscape
(Sørensen 2000; Therborn 2002). Key contributions toward conceptualizing the class
structure of advanced capitalist economies in an empirically useful manner have been
made by Erickson and Goldthorpe (1992) and Wright (1997). Also, an impressive body
of literature has emerged that relates class structure to inequality. Wright and Perrone
(1977) estimated regression models for the United States in 1969 with annual income as
the dependent variable and education, age, Duncan’s Socio-Economic Index of
occupational prestige, and class as independent variables. Their comparisons of
alternative specifications showed that class categories accounted for a larger proportion
3
of the explained variance in income than occupational prestige. Similarly, research based
on the Goldthorpe-Erickson class schema challenged the “liberal” notion that disparities
in educational attainment among social classes tend to decline in advanced capitalist
nations. Based on the estimates from logistic regression models using early 1970s data
for men in age group 30–65 from nine European nations, Müller and Karle (1993)
showed that the probability of transition from the lower to higher levels of educational
attainment was higher for those higher in the class hierarchy.
While the class schemas mentioned above have proved useful in empirical
research, they are inadequate in their specification of the capitalist class. We propose a
schema that attempts to overcome this deficiency. Further, the relationship between class
structure and economic inequality has not received due attention. The few available
studies (Wright and Perrone 1977; Robinson and Kelley 1979; Schooler and Schoenbach
1994) focus on estimating the (conditional) effects of class categories on income. We
adopt an alternative strategy, based on the decomposition of the Gini coefficient, to
highlight the relationship between overall inequality and stratification along class lines.
We also analyze the contributions made by different sources of income to overall income
inequality. Another distinctive feature of our approach is that, unlike most studies that
use gross money income or earnings as the income measure, we use a post-tax, post-
transfer, wealth-adjusted measure of income that better reflects economic well-being.
We focus on the United States, the country that currently occupies the position of
the world’s leading capitalist economy. We chose two benchmark years, 1989 and 2000,
because these two years can be considered as the terminal years of the last two upswings
of economic growth in the United States during the twentieth century. The U.S.
macroeconomic performance during the intervening period between the benchmark years
was exceptional among the developed capitalist nations.

4
2. OPERATIONALIZING CLASS

The primary distinction in Marxist theory regarding class is between those who own and
do not own means of production. While direct ownership dominated at an earlier stage of
capitalism, major assets in private hands are held under corporate ownership in modern
capitalism. As Marx and Engels noted in Volume 3 of Capital, the separation of
ownership and control in production activities had become a powerful tendency in the
second half of the nineteenth century (Marx 1991). They also noted that the separation
leads to the formation of a managerial class, entrusted with the charge of “other people’s
capital,” and a financial capitalist or rentier class.1
In spite of this fundamental transformation in capitalism, empirical studies in the
Marxist tradition tend to identify the capitalist class as a subset of the self-employed.
Essentially, a capitalist is defined as a self-employed person who employs some
minimum number of employees. The minimum is specified differently across studies.
Thus, Wright and Perrone (1977) and Western and Wright (1994) defined the required
minimum as one employee. Wright (1997) defined the capitalists as self-employed
persons who employ ten or more workers. Hogan (2005) used three employees as the
required minimum, while Schooler and Schoenbach (1994) defined “employers” as self-
employed persons who employ at least four nonfamily employees.
The principle rationale behind this criterion is that the hallmark of those who
belong to the capitalist class is their employment of others for the purpose of making
profits. There are a few problems with this rationale. First of all, it can be hard to separate
the net income of a self-employed individual into wages and profits.2 Second, if the self-

1 In his Supplement to Volume 3 of Capital, Engels noted that the rapid pace of capitalist accumulation in
the 1870s and 1880s led to “a growth in the number of rentiers, people who have tired of routine exertion in
business and who simply want to amuse themselves or pursue only a light occupation as directors of
companies” (Marx 1991).
2 This problem is also encountered in estimating aggregate wages or variable capital (e.g., Shaikh and
Tonak 1994). Typically, an arbitrary assumption is made to split the net income of the self-employed into
wages and profits (e.g., estimating an imputed wage by assigning the average wage of employees to the
self-employed and then subtracting the resulting total wages from net income to obtain imputed profits).
5
employed serve in effect as subcontractors for large corporations then the social relation
between them and their employees will be more of a supervisory relation than a
capitalist-worker relation. Most importantly, this approach neglects three important facts
about the modern U.S. economy: (i) the overwhelming majority of private-sector
employees work for corporations; (ii) corporations own the vast majority of private-
sector nonresidential fixed assets; and (iii) corporations account for the bulk of business
receipts. Thus, corporations rather than individual business owners dominate production
for private profit. Using the criterion can at best identify small business owners.3
An alternative approach, therefore, would be to identify those who control the
corporations as the capitalist class. This was the approach taken by Michael Zweig,
which has its roots in the sociological tradition of studying the elites (Domhoff 1998).
Zweig argued that the capitalist class is made up of the owners and top management of
big business (defined as enterprises with more than 20 employees). He estimated that
they constituted 2 percent of the labor force in 1995. This estimate was apparently
constructed on the basis of the average number of directors on the board of big business
enterprise and the total number of big businesses (Zweig 2000). Thus, while Zweig’s
concept of the capitalist class includes the owners and the top management, his estimate
of it appears to consist only of the board of directors.
Either criterion—the number of employees under a self-employed person or
membership in a corporation’s board of directors—is insufficient to include the financial
aristocracy among the ranks of the capitalist class. Wright did recognize this limitation of
his criterion, but argued that including them would have only a negligible impact on the
estimated size of the capitalist class (Wright 1997). Given the relatively small number of
households that make up the financial aristocracy, Wright is indeed correct. Yet,
admittedly, estimating the distribution of households or individuals across class locations
is only a step in most research; the interesting and often more difficult issues pertain to
the relationship between class structure and other characteristics of individuals, such as
race, income, or educational attainment.

3 Wright and Perrone recognized this limitation, but attributed it to the limitation of their particular sample
rather than to a structural feature of modern capitalism (Wright and Perrone 1977).
6
In this study, we identify the capitalist class on the basis of nonhome wealth.
Nonhome assets included in this definition include real estate and businesses (business
equity), liquid assets, financial assets (stocks, bonds, etc.), and retirement assets
(excluding the value of future benefits from public or private pensions). Nonhome wealth
is calculated by subtracting all debt (excluding mortgage debt) from the value of all
nonhome assets. A household is considered to be a capitalist household if it has nonhome
wealth of at least $4 million or business equity worth at least $2 million (dollar amounts
are in 2000 dollars). While the thresholds are arbitrary, they would be, under normal
circumstances, sufficient to yield a property income that can provide a household with a
standard of living that is beyond the reach of the majority of households.4 In effect,
members of capitalist households may be considered as being free from the economic
compulsion to engage in wage labor by virtue of their exceptionally large amounts of
wealth. Moreover, our definition includes the so-called “rentier” class—those who can
live off the mere ownership of their wealth.5
For wage or salary-earning individuals in noncapitalist households, their position
in the social labor process is the determinant of class location. Previous research has
delineated positions in the labor process using the authority dimension and the
skills/credentials dimension (Goldthorpe 2000; Wright 1997). The complex approach to
operationalizing these dimensions is to classify individuals on the basis of responses to a
battery of questions regarding the actual content of their jobs, the number of subordinates
and superiors they have, etc. The simpler approach classifies individuals based on their
occupational titles. Comparison of results based on the two approaches suggests that the
simpler method performs quite well in capturing the main features of the class structure.6

4 Assuming a modest 4 percent rate of return, the thresholds imply that the potential property income will
be $160,000 (for nonhome wealth) or $80,000 (for business equity). In contrast, median household income
in 2000 was $42,000. An income of $80,000 would have placed the household in the top 20 percent of the
income distribution and that of $160,000 in the top 5 percent.
5 In more dated terminology, these individuals would have been referred to as “coupon clippers.”
6 The comparison found that the biggest problem was with the category of “managers,” where occupational
title did not always reflect the actual job content. On the basis of the more complex operationalization, a
third of those with the occupational title of managers had to be reclassified as supervisors or nonmanagerial
employees (Wright 1997)
7
We used the Census Bureau’s detailed occupational codes (499 in 1989 and 494 for
2000) to group employees into six class locations: managers, supervisors, professionals,
white-collar skilled workers, blue-collar skilled workers, and nonskilled workers. In this
typology, we distinguish workers both by their supervisory relationship and by the skill
content of their work. A comparison between our schema on the one hand and the
Goldthorpe and Wright schemas on the other is shown in Table 1.
Our main difference with the Wright schema is that we do not make distinctions
within the managerial and supervisory groups according to skills or expertise level. Their
principle task is to manage the labor process for profit and it is the “skill” in performing
this task that defines the social relation between them and others (the owners above them
and the employees under them).7 Our distinctions among the nonmangerial and
nonsupervisory employees may be viewed as falling somewhere between the other two
schemas in terms of detail. The central consideration behind the groupings for us is the
degree to which the worker can maintain some control over the labor process. Wright, on
the other hand, viewed the skills and expertise dimension in terms of the ability to
command wages over and above the cost of labor power (Wright 1997). For Goldthorpe,
the crucial factor is the differences in the employment contract (explicit or implicit) faced
by different categories of employees (Goldthorpe 2000). Admittedly, while the different
rationales are conceptually important, it is quite unlikely that they will lead to drastic
differences in the resulting empirical class schemas (Therborn 2002).
Individuals in noncapitalist households who are self-employed are treated as a
distinct group separate from employees. We could call this group the “petty bourgeoisie,”
but because it can include individuals enmeshed in qualitatively different sets of social
relations, we designate them simply as “self-employed.” This group consists of owners of

7 “Just as at first the capitalist is relieved from actual labor as soon as his capital has reached the minimum
amount with which capitalist production, properly speaking, first begins, so now he hands over the work of
direct and constant supervision of the individual worker and groups of workers to a special kind of wage
laborer. An industrial army of workers under the command of a capitalist requires, like a real army, officers
(managers) and N.C.O.s (foremen, overseers), who command during the labor process in the name of
capital. The work of supervision becomes their established and exclusive function.” (Marx 1977).
8
small enterprises, as well as professionals (doctors, lawyers, consultants, etc.) and skilled
craftspeople (plumbers, electricians, etc.).
Occupational codes in our data are available only for those in the civilian labor
force who worked for pay or those who were self-employed during the previous year of
the survey (earners). Our schema (like the Wright and Goldthorpe schemas) leaves
individuals who did not engage in market work without any class location. There have
been extensive debates about the class character of unpaid household labor (for a review,
see Mutari 2001); there is also a substantial literature on whether employable adults out
of the labor force constitute a reserve army of labor or an underclass with a separate class
identity (e.g., Marshall, Roberts, and Burgoyne 1996). Since there is hardly a consensus
on these issues, we follow the standard procedure of not assigning these individuals a
class location directly. However, since our basic unit of analysis is the household (see the
next section), the class location of earner households is determined by the class location
of a single earner in the household (“reference person”). As a result, other earners and
nonearners in such households are indirectly assigned a class location.8
Our basic data is drawn from the public-use files of the Census Bureau’s Annual
Demographic Supplement (ADS). However, the ADS does not have any information on
household wealth, the crucial variable for identifying capitalist households. We therefore
statistically matched the ADS with the Survey of Consumer Finances (SCF), conducted
by the Federal Reserve in 1989 and 2001. The idea behind the matching algorithm is to
find, for each household record in the ADS a household record in the SCF that matches it
closely in terms of key characteristics, such as race and age of the householder,

8 Individuals left out of our schema can be subdivided into two types of (noncapitalist) households:
households with only individuals 65 years or older (elderly households) and nonearner households with at
least one working-age adult. It could be argued that the elderly households should be assigned a class
location based on their class location before retirement; however, no such information is available in the
data. As for the other type, it turns out that the vast majority of prime-age adults in such households are
military personnel (82 percent in 2000). In the survey, military employment is coded as a separate
occupation in itself and cannot therefore be included in our class schema.
9
household income, etc.9 The total number of capitalist and noncapitalist households in the
sample were 47,139 in 1989 and 64,594 in 2000.

3. CLASS STRUCTURE

3.1. Unit of Analysis
Our unit of analysis is the household. This choice of the unit of analysis requires the
designation of a particular individual in the household as the “reference person.” The
class location of the household is considered as equivalent to the class location of the
reference person. Following the convention, we have picked the person designated as the
“householder” by the Census Bureau as the reference person for capitalist households and
households in which the householder is an earner (i.e., either an employee or self-
employed). For noncapitalist households in which the householder is not an earner, we
designated the person with the highest earnings as the reference person. Our approach to
determining the household’s class position can be described as a combination of the
conventional approach that uses the position of the household head and the dominance
approach of Erikson that uses the position of the earner with the dominant occupational
position (Erikson 1984; Sørensen 1994).10
An alternative to the above approach would be to choose the individual (with an
assigned class location) as the unit of analysis, i.e., to expand the sample to include all
individuals with class locations, rather than just the reference persons. This could
potentially change the picture regarding the overall class structure. But, in our data,
estimates showed that the class structure was pretty much invariant to the choice of the
unit of analysis: the percentage distribution of class locations was largely the same for
both units.

9 Details on the matching algorithm are available from the authors upon request.
10 It should be noted that the Census Bureau’s definition of the householder is different from the traditional
definition of the household head. The householder is the person in whose name the housing unit is owned
or rented. In cases of joint ownership or lease, the Bureau assigns the householder status randomly.
10